Paguay v. ESH Restaurant Group LLC

Background

Jose Paguay brought a proposed class and collective action against ESH Restaurant Group LLC and other defendants under the Fair Labor Standards Act and New York Labor Law. He alleged that, while working at the restaurant, he was required to clock out for lunch but continue working, causing him to lose overtime and regular wages. He also alleged that the employer failed to provide required wage notices and wage statements. He sought an injunction concerning the defendants’ arbitration agreement. No class or collective had been certified or conditionally certified.

Paguay signed an arbitration agreement on January 27, 2023. The agreement required covered employment claims to be submitted to the American Arbitration Association for final and binding arbitration under its Employment Arbitration Rules. It barred court litigation and class or collective proceedings for covered claims. It also required an arbitration demand within 180 calendar days after the claim arose, even if a longer deadline would otherwise apply. The agreement included a severability provision stating that the remaining provisions would stay in effect if a provision were found unlawful, and that certain provisions would automatically be modified to comply with federal or New York law.

Motion to Compel Arbitration

The defendants moved to compel Paguay to arbitrate individually. Paguay acknowledged signing the agreement but argued that it was unconscionable and unenforceable because the 180-day deadline shortened the limitations period for his claims.

The court explained that an arbitration agreement may delegate the question of arbitrability—whether a dispute must be arbitrated and whether the arbitration agreement is enforceable—to an arbitrator. The agreement incorporated the American Arbitration Association’s Employment Arbitration Rules, which authorize an arbitrator to decide issues concerning the existence, scope, or validity of the arbitration agreement. The court held that this incorporation clearly delegated arbitrability questions to the arbitrator.

Paguay argued that the agreement’s severability provision showed that a court, rather than an arbitrator, had to decide whether the 180-day provision was unlawful. The court rejected that argument. It found that the provision did not require a court to decide enforceability instead of an arbitrator and did not conflict with the delegation clause. The court also rejected Paguay’s argument that he should not be bound because he might not have reviewed or understood the American Arbitration Association rules. Under the law applied by the court, a person who signs a written contract is presumed to know and accept its contents, including terms incorporated by reference.

Ruling and Effect

The court held that the agreement contained a valid delegation clause. It therefore did not decide whether the 180-day provision was unconscionable or whether that provision made the agreement unenforceable; those questions were left for the arbitrator. The defendants’ motion to compel arbitration was granted, and the action was stayed pending arbitration.

The court did not decide the defendants’ separate motion to dismiss because it was a dispositive motion outside Magistrate Judge Katharine H. Parker’s referral. The court also did not decide Paguay’s cross-motion for certification under Federal Rule of Civil Procedure 23(b)(2). Paguay’s counsel was directed to file his claims in the appropriate arbitration forum, and the parties were directed to provide a joint status update by July 1, 2024.